Q1 2023 Kimball International Inc Earnings Call
Regarding our return to growth in this end market in the second half of fiscal year 2023.
As one of the largest providers of case goods lounge seating and ancillary products to the hospitality industry, we will clearly benefit from a turnaround in this sector in the future demand trends.
To sum up our first quarter performance represented a solid start to fiscal 2023 and has set the stage for another year of growth for Kimball International.
Now I will turn over the call to our CFO T. J Walsh for review of our first quarter financials, and a discussion of our outlook for fiscal 2023 P. J.
Thanks, Christy and good afternoon, everyone. We began our new fiscal year with solid first quarter results, giving us confidence in our strategic priorities and keeping us on track to achieve our full year guidance.
Net sales increased 14, 2% to $177 8 million led by our workplace and help end markets.
Sales in workplace increased 22%, mainly in the commercial and education verticals.
<unk> revenue increased 13% as providers in this sector have begun to reengage on projects that were postponed during the pandemic.
As expected the hospitality market remained challenging with revenue decreased decreasing 21% compared to the year ago quarter.
Gross margin increased 220 basis points to 33, 5%, reflecting proactive pricing actions to offset inflationary costs and supply chain pressures as well as higher utilization from improved sales volume.
The slight sequential decline in gross margin was mainly driven by higher freight and logistics costs.
Selling and administrative expenses were $53 4 million or 30% of net sales a decrease of 210 basis points year over year exclude.
Excluding the amortization from the <unk> acquisition totaling $1 5 million as well as surf adjustments adjusted SG&A was $52 4 million or 29, 4% of net sales compared to $48 6 million or 31, 1% a year ago.
First quarter 2023, GAAP net income was $6 $6 million or <unk> 18 per diluted share inclusive of a <unk> <unk> per share after tax contingent earn out gain.
This compares to a GAAP net loss of $5 million or <unk> 14 per diluted share in the year ago quarter.
Excluding the gain as well as the acquisition related amortization restructuring expense adjusted net income was $4 8 million or <unk> 13 per diluted share up from an adjusted net income of $1 9 million or <unk> <unk> per diluted share in the first quarter of fiscal 2022.
Adjusted EBITDA grew to $11 5 million up significantly from $4 9 million in the fiscal 2020 to first quarter.
Adjusted EBITDA margin also more than doubled to six 5% from three 1% in the year ago quarter.
Moving to our order trends workplace orders were up 1% with price more than offsetting volume declines supported by demand in the commercial vertical.
Orders in the health end market were up 3% with price more than offsetting volume declines recovering from a decline in the quarter ended this past June .
Orders in the hospitality end market declined 4%. However, the cadence of order trends in hospitality suggests a bottoming of demand and potential return to growth in the next quarter.
Our total backlog at quarter end was $180 million compared to $170 8 million in the first quarter of fiscal 2022.
With lead times for all major product lines back within one to two weeks of pre pandemic or normal lead times.
Assuming no new supply chain disruptions, we would expect them to reach our desired lead times by Q4.
And generally our backlog is comprised of 75% workplace health and 25% hospitality orders.
Turning to the balance sheet and cash flow statement. We ended 2023 first quarter with total available liquidity of $75 million, consisting of $17 million in cash and $58 million from the unused portion of our credit facility at the end of the first quarter, our net debt to adjusted EBITDA ratio was one two times.
In the first quarter, we generated $18 1 million in operating cash flow cash.
Capital expenditures of $5 4 million consisted of investments in our warehouse and Jasper, which is now fully operational updating showrooms manufacturing equipment automation to drive our operational excellence programs and enhancing the customer experience. We returned $4 3 million of capital to shareholders in the form of dividends and share repurchases.
We continue to focus on finding solutions for eliminating running hot costs and supply chain disruptions. While also continuing to invest in more efficient operations. For instance, we have modified our warehouse network to provide for a single point of order dispatch and we are halfway through the process of installing our metal automation infrastructure, which combined with low in steel.
Prices will drive further operational efficiencies. This project is expected to go online in April 2023.
We have also initiated several initiatives to reduce our working capital levels, which we estimate reached its peak during the current quarter and we anticipate will begin to ease over subsequent quarters improvement in our cash conversion will enable us to further reinvest in our business reduce leverage and return additional cash to shareowners.
Now looking at our 2023 outlook, we reaffirm our 2023 revenue guidance of $750 million to $780 million, representing approximately 15% growth at the midpoint.
And our adjusted EBITDA guidance of $48 million to $52 million, representing approximately 47% year over year growth at the midpoint we.
We expect full year revenue and adjusted EBITDA to be weighted towards the second half of the year with the fourth quarter being the strongest.
Our guidance reflects current order trends through October additional price realization from actions already taken and a reduction in backlog during the second half of fiscal 2023, driven by improved operational performance.
We are planning for full year capital expenditures of approximately $25 million and expect our full year effective tax rate to be in the range of 25% to 27%.
As for the second quarter, we expect revenue to be similar to Q1 levels and adjusted EBITDA to be slightly below Q1 levels, mainly due to a temporary increase in freight and logistics costs.
With that I will now turn the call back to Christie for her closing remarks.
Thanks T J.
We are very pleased with our positioning as we move forward in fiscal 2023, our first quarter results Mark a solid start to our new fiscal year.
Through our focused set of strategic choices, we are successfully delivering products and solutions end markets and geography of high growth resiliency and favorable return to offense dynamics, while we are mindful of the challenging macroeconomic environment and heightened recessionary risks we are confident in our ability.
Continue to gain share and outperform the industry.
Finally in September we published our 2021, ESG report, which outlines our company's fiscal 2023 goals and provide details on our ongoing commitment.
Favorable business practices.
I'd like to thank our employees customers and partners that enable this commitment.
International believes in creating places to belong where each individual feel safe productive included in value.
Thank you again for joining us today, and now operator, I'd like to open the call to questions.
And we will now begin the question and answer session.
That's a good question.
The Oregon, one with what you're saying.
If youre using a speakerphone please pick up your handset corporate HQ.
To withdraw your question. Please press Star then two and at this time, we will pause momentarily to assemble ore.
Hello, Great question today will come from Greg Burns with Sidoti.
Please go ahead.
Good afternoon.
Could you please quantify.
Sure.
How much.
The orders were impacted by price versus volume and how much were volumes down versus.
Price.
Sure Greg So if we look at let's look at revenue first we look at shipments in the quarter.
Plus 14% was primarily price was plus 16 in price actually in minus two and volume.
And then if you go to the orders, which were plus one that was plus 15 in price and minus 14 in volume for the orders in the quarter.
Okay.
And.
Relative to pricing have you fully realized.
Well the pricing that you've tried to pass along over the last 12 months and or is there any.
For the room for price realization and margin improvement from here.
Yes, Greg I think if you look at the backlog, we would say that the backlog contains but somewhere between 80% to 90% of all the pricing actions. We've taken so we feel that we've realized on the vast majority of the price.
In the backlog for future shipments so.
<unk> saw slight amount to go but the majority of that has been has been put in place.
Okay, Great and then in terms of demand trends.
Obviously, you are maintaining your guidance for the year. So it doesn't seem like things have deteriorated since the end of the quarter, but could you give us maybe some insight into what youre seeing is.
Is it.
Are you seeing the.
The slowdown in major metros being offset by high growth in your secondary markets like how is that dynamic playing out for you.
Sure.
We look carefully at our metro markets versus kind of secondary and tertiary markets and there is a significant difference in those two markets and our own performance.
We would say metro markets are certainly kind of in line with industry.
Growth trends and we are seeing a much different about a 15 point difference.
In secondary markets.
And Greg when you look at through October the order rate through October has a similar trend for the course, so orders were roughly flat versus prior through the month of October .
And just the other thing that I would comment is when you look at the mix of our business versus industry, certainly because 75% of our business is in secondary markets. It makes a big difference for us how the overall business is performing.
Okay, and then I guess just.
Just back to the.
Price versus volume so when you look at the full year guide with the 15 point.
Increase in revenue Thats, mainly all coming from from price.
Yes, the vast majority of that is going to be is going to be price, Greg and I think when we think about kind of the other the other elements that will that will kind of fueled the growth in the back half. It. So it was never a volume driven growth sales price also we expect the backlog to convert faster. So we would see as lead times come in we would see a reduction in the backlog.
And then we've talked a little bit about the hospitality recovery and we are beginning to see a place where those orders are stabilizing and we see growth potential. So we think hospitality will perform more favorably in the second half of the year as well.
Okay, great. Thank you.
Thanks, Greg.
And our next question will come from Reuben Garner with the benchmark Company go ahead.
Thanks, Good evening everybody.
<unk>.
So I guess.
It sounds like orders you are starting to see some some volume declines, even though youre still outperforming the industry I'm. Just curious if you could kind of go into what gives you confidence there.
Things are going to recover to be able to meet that full year guidance based on what you know.
At this point.
Yes, sure Reuben So I think a few other things to note during the quarter. If you look at the pattern in the quarter.
We certainly saw that August was the weakest month of the quarter. So.
Start off in July softened.
Significant in August and then came back up in September and then we've seen that September level sort of carry straight across maybe a little bit of choppiness, but I think that that's.
One point I think when we look at also the buying patterns for something like education buying season, that's clearly something that fuels, our second half of the year growth.
We think that that might come slightly earlier than it has in the past. So we think there could be some growth from from education buying and then again the points I just kind of made previously there will be some reduction in the backlog that will convert into shipments in the second half from the current levels and again I think we would I would point out that we do believe.
He will perform more strongly in the second half of the year than it does in the first half and Thats not really fully reflected in the order patterns that we see year to date. So we think that's going to be.
Another growth lever.
Okay, and then in the press release and sorry, if I missed this.
On the call already been in the press release you reference.
Logistics your logistics network kind of hitting the second quarter any more color you can give us there on what exactly is going on.
Yeah sure. So if you think about in the logistics kind of the whole logistics area Ocean freight costs have certainly decreased significantly so they move a container from Asia to either the east or West coast. Those have maybe been cut in half however, because theres still a lot of congestion domestically, we experienced higher costs from store.
<unk> containers at the ports longer and then also congestion in our own warehousing network.
Along with three PL providers that added incremental cost. So we are in the process of getting the logistics network fully optimized and once we do that those costs will come off and so that's something we're in the process of doing now but that will be we will experience those higher cost again in this in this quarter.
Okay, and then last one for me can.
Can you give us a little bit more color on the timing of.
Expected benefits on pop and is that something that is material enough that it's giving you some visibility into the revenue growth as we move through the year that might not necessarily be showing up on the order front.
Over the last few months.
Yes.
Absolutely Reuben So I think if you look at pop ins business one of the things that we've talked about is that in stock ready to ship model pop and does not operate with really a backlog and so when you see a slowdown in an order pattern. It really impacts poppins business immediately so I think as we talked about major metro markets, which are popping strength.
Along with the fact that there is no backlog you see that that depressed kind of <unk>.
And popping in the in the moment and we mentioned in a flat year on year.
And again, we believe that that will begin to recover in the second half and the positive side of that pop in benefits quickly from a recovery when it does occur. So if we do see order patterns recover further in the second half of the year pop and would benefit from that.
Quite quickly.
And we've been I would just add that when you think about the new incremental opportunities that we've launched with pop and <unk> pro the new pod category secondary markets. Those those are brand new initiatives that we've been working on for about a year.
We're very pleased with how those are progressing and so those will become a bigger part of <unk> going forward.
Okay, and I said last one I want to sneak one more in the health care vertical how did those orders hold up relative to others over the last.
A few months is that an area, that's maybe less kind of sensitive to the macro concerns and might hold up better this year.
Yes, I'll just give some top level comments and let TJ talk about the trends.
The health.
The vertical is back our business is back to pre pandemic levels.
So we are we are very pleased with how that health business is operating we are involved and have been involved in some longer lead time opportunities that we've been working.
And so we're pleased with how the funnel is actually building you can feel.
And focus coming back to kind of redesigning and working with the interiors that those environments. So we do believe that that business will come back and you can start to see that.
And the order trends that youre seeing this quarter.
Okay, great. Thanks, guys and good luck on through the rest of the year.
Thanks Robyn.
And once again, if you would like to ask a question. Please press Star then one.
Will come from Budd <unk> with water Tower Research go ahead.
Yes.
Congratulations on a.
Good quarter.
And good afternoon.
Yes.
Sure Budd.
A couple of questions if I could.
On the price versus cost any commentary that you could give us any differential between the end market.
Of price versus cost in the quarter and also in the backlog.
Yeah, yeah, but so I think the margin expansion, if you kind of look at.
How we achieve that.
Say broadly 300 basis points of expansion was our ability to realize price above inflation and then there was about a 100.1 hundred basis point deterioration from some of these incremental logistics costs that we're experiencing both in the previous quarter and into Q2. So I think over the course of fiscal year 'twenty two.
<unk> <unk>.
Price cost was sort of holding holding par level now we've got to the point, where the pricing actions are begin to.
Cover inflation and so in the backlog as we mentioned almost.
The entirety of the backlog between $80 to 90% contains all the pricing actions, we've taken and so we're quite comfortable with where we stand right now in relation to that.
And is there any difference in the end markets of price I mean were they was it was it was the inflation felt pretty much across the three end markets.
It was the only differential I would say is that because hospitality is both a prime almost entirely project based business and because of that is sourced project product as well either from Asia or Latam.
We experienced higher costs as far as ocean freight goes, but as far as workplace and health really no differential between the two.
I was interested T J and your comments about the logistics cost and I'm going to see if I can challenge a little bit on this I think I think container costs does that Max out at around $20000 for a $40 44 or during the <unk>.
The heady times and you said at the very high <unk>, maybe even 15, but you're at the very high end yes.
So and it started at around three or four right when before the before we went through.
All of the.
The inflation show the increasingly logistic costs youre not back yet to where you were pre pandemic.
Correct I think what I think what we'd say is.
The cost has moved on Ocean container has come off significantly it's not back to pre pandemic, but it's come off of the highs what has impacted us in the very recent quarter and well into Q2 is the fact that as containers came in they stacked up for a much longer period of time at the port and that is the highest cost.
Asian to store those goods and so as we try to relieve the goods from the port we're going to experience the impact of those costs and then we also had to acquire additional warehouse space, we talked about this.
On our last call and now our inventory balance we would say is higher than we would like it to be we believe it peaked this quarter and so as the inventory balance reduces we'll be able to both reduce our warehouse footprint and ease those.
Logistics costs into Q3 and four.
I may be the only one on the call that has experienced the unpleasant demurrage in the past.
All of them.
I'm very much aware of how that that is a very painful.
Cost show can you give us a feel of how much demurrage, who did incur in the quarter.
And what are you.
Thank you you can get rid of it.
Yeah, I think from a from a gross margin standpoint.
A number that could be between 50 to 100 basis points. So I think it's it's a it's impactful number that needs attention needs to be work. So I think.
We were pleased that we could expand margins, even with that headwind there, but again, we think that will stay for another quarter or two.
Do you think you don't think you can get that to mortgage I mean, there it is.
It is truly unconscionable, what they do to you.
So it may be one of the best regions in the world to get angry.
So what you're going to take you another quarter or two to get rid of the two at least allow them allow for them to allow you to get get the containers out of the port.
Yeah, I think I think it's just it's everyone is dealing with this too but the congestion there. The fact that the containers, we can only get so many hours a day. So it just is it's an unfortunate.
Situation once you're there it does take some time to solve the to solve the challenge.
What is the leeway these days three days before they start charging you.
Yes, I mean in some cases its immediate as well so you do get a day or two typically as you say to move it off the off the port onto either rail or truck, but.
But it also yeah, but then it begins quickly after that and the cost out of quite quickly.
Just conscionable.
Okay.
That's very helpful for me.
I must have something done did something wrong, because I didn't have a lot of time to really digest. The release, but one question I do have is orders were $10 million overall higher than shipments and I would've thought that would've been the add to the backlog, but it turned out to be only about $4 million.
What's wrong with my math, there's something wrong with that.
Sure.
I think that I think that math directionally correct. The other thing again, when you're talking to these numbers looking at the inventory change. The finished goods made the inventory change and then wed have to look at.
Any cancellations, which are typically not material as well, but I have to do all the math across that to see if I can I haven't worked out the calculation.
Here with you about.
Yeah that would be how you'd expect it to work in backlog.
Plus plus orders minus sales equals ending backlog I think I mean, I think that's I think that's the math.
So unless the orders are not net orders that.
That's why I get a smaller small difference or a $4 million.
Exactly yes, something like that but that's right.
Okay. So maybe you can offline you can help me with that math, Okay. I appreciate it sure.
Alright, Thank you very much good luck on the.
In the ensuing quarters in the year.
Thanks, Bob Thank you Matt.
And this concludes our question and answer session I would like to turn the conference back over to Kristie Juster, you for any closing remarks.
Yes. Thank you for joining us this evening and as we reflect on the quarter, we're really pleased with how our strategy and the key choices that we've made over the last few years are playing out as our business is starting to ramp back to pre pandemic levels. So we look forward to keeping you posted and have a nice evening.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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